Economic Worries and Payday Loans

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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People are worried about everything.

It would not be difficult for this newsletter to have a recurring daily section titled, like, "people are worried about the global economy." Someone is always worried about the global economy; worries about the global economy are -- and I realize this is hard to believe -- even more evergreen than worries about bond market liquidity. I am not actually going to add it as a recurring section; life is short, and we have to focus on the important worries, like stock buybacks and unicorns and bond market liquidity. Still, there's a lot of worrying about the global economy these days! Janet Yellen testified before Congress yesterday, and expressed worries about the U.S. economy, though if I were her I'd have been more worried about what bizarre irrelevant questions Congress was going to throw at me. "I feel that I am at a ballroom dance on the deck of the Titanic," said one Congressman, presumably a metaphor for economic worries. Interest on excess reserves also, unsurprisingly, got a workout.

Elsewhere, Kyle Bass "said China’s banking system may see losses of more than four times those suffered by U.S. banks during the last crisis":

“What we are witnessing is the resetting of the largest macro imbalance the world has ever seen,” he wrote in the letter. “Credit in China has reached its near-term limit, and the Chinese banking system will experience a loss cycle that will have profound implications for the rest of the world.”

European banks have had their own worries, including this one:

Société Générale SA Chief Executive Frédéric Oudéa said investors were overreacting as the French lender’s shares plunged over 14% Thursday, leading European banks lower following its warning that it could miss its profit target this year.

He would say that. And shipper "AP Møller-Maersk warned that it was facing conditions significantly worse than the financial crisis after it plunged to a large net loss as global trade growth ground to a halt last year," though Maersk isn't as cavalier as Congress is about throwing around the Titanic metaphor.

Payday lenders.

Yesterday the U.S. Attorney for the Southern District of New York announced criminal charges in two Internet payday lending cases, one against Richard Moseley and the other against Scott Tucker and Timothy Muir. The main allegations here are that the Truth in Lending Act disclosures for these payday loans were false, because they neglected to point out that the loans would automatically roll over, e.g.:

While the TILA Box suggested the borrower would pay $30 in interest for every $100 borrowed, in truth and in fact, through at least 2012, TUCKER and his co-conspirators structured the repayment schedule of the loans such that, on the borrower's payday, the Tucker Payday Lenders automatically withdrew the entire interest payment due on the loan but left the principal balance untouched so that, on the borrower's next payday, they could again automatically withdraw an amount equaling the entire interest payment due (and already paid) on the loan.

Shady! Tucker and Muir are also charged with evading state usury laws by teaming up with Native American tribes and getting the tribes to file "false factual declarations in multiple state court actions" asserting sovereign immunity and saying that the tribes, rather than Tucker and friends, were the ones making the payday loans, an arrangement known as "rent-a-tribe." Moseley is also accused of lying about being located overseas, and of making "numerous payday 'loans' to victims across the country who did not even want the loans or authorize the issuance of the loans, but instead had merely submitted their personal and bank account information in order to inquire about the possibility of obtaining a payday loan." Very shady!

Moseley is accused of starting this in 2004, Tucker in 1997, and they got consumer complaints the whole way. I am not an expert in consumer lending law, but I must say our system of financial regulation is pretty strange. These guys were -- allegedly -- automatically rolling over payday loans for more than a decade, and doing it fairly openly on the Internet. Now the Justice Department has decided that that was a crime, one "which carries a maximum term of 20 years in prison." Wouldn't it have been better to explicitly ban automatic rollovers of payday loans in, say, 2006? Rather than wait another decade, decide it was illegal all along, and prosecute these guys now? Our general system of financial regulation by after-the-fact criminal enforcement is not always great for predictability or the rule of law, but it is also just unavoidably after-the-fact. I suspect the people who provided Tucker's businesses with $2 billion in revenue since 2003 will be happy if he goes to prison, but they'd probably be even happier if there'd been clear rules in 2003 preventing him from taking all that money from them.

Market structure.

The IEX exchange saga continues, with another Securities and Exchange Commission comment letter filed by IEX this week. Everyone kind of knows the arguments by now, right? I must say I find pretty persuasive IEX's argument that, if it's illegal to coil cables to delay quotes, then every exchange is guilty, since "the New York Stock Exchange ('NYSE'), Nasdaq, and BATS all coil cable within their data centers (termed a 'delay coil' by the Nasdaq CEO) to equalize latency among their paying co-located members." The argument that IEX's router should be able to skip the delay coil is more complicated, and we have talked about it at some length. Here I just want to say that I seem to be losing the fight against semantic drift in the term "front-running":

Several opposing comment letters claim that the IEX Router creates an unfair advantage. These arguments have attempted to take a complex subject and distort the facts to divert attention from the real reason for their objections: the IEX Router protects clients from electronic front running. In this letter, we use the term electronic front running to refer to the ability of an opportunistic trader to trade ahead of IEX’s clients based on speed advantages and information concerning IEX’s clients’ orders.

A footnote adds: "We use this term to distinguish it from the traditional use of the term front running, which refers to a broker-dealer that trades ahead of its own client’s orders, versus a scenario where a broker trades ahead of IEX’s routing client." Traditional front-running is illegal, because brokers have fiduciary obligations to execute their customers' orders before trading for themselves. "Electronic front-running" just means, you see a trade happen in one place, and you update your prices somewhere else. It just means acting faster in the markets than someone else does. That's allowed! Encouraged, even. Should IEX be able to protect its customers from high-frequency traders who act faster than them? Quite possibly! But it's not "front-running."

Twitter.

The basic narrative of Twitter is that hundreds of millions of people use it and love it, but billions of people use Facebook and are kind of meh about it, and Twitter would rather be Facebook because of the ad revenue. But, the story goes, becoming Facebook would alienate Twitter's core users, and Twitter has been paralyzed for years by a perceived need not to annoy that core. The paralysis got so bad that Chief Executive Officer Dick Costolo had to leave, and the company was handed back to multitasking co-founder/CEO Jack Dorsey, whose status as a co-founder gave him the credibility needed to turn Twitter into Facebook. And he dove right in: In October, Twitter introduced Moments, a ... thing ... for ... people who hate Twitter? I don't know. Yesterday -- hours before Twitter released earnings, though separated from the earnings by a fire drill at Twitter headquarters -- Twitter introduced a new algorithmic feed to show you "the Tweets you're most likely to care about," like Facebook. Much longer tweets -- you know, like Facebook posts -- are coming soon. And yesterday Twitter released earnings along with a shareholder letter promising to continue "relentlessly" to become more like Facebook:

We are going to fix the broken windows and confusing parts, like the .@name syntax and @reply rules, that we know inhibit usage and drive people away. We're going to improve the timeline to make sure you see the best Tweets, while preserving the timeliness we are known for. The timeline improvement we announced just this morning has grown usage across the board (including Tweeting and Retweeting). We're going to improve onboarding flows to make sure you easily find both your contacts and your interests. We're going to make Tweeting faster while making Tweets more expressive with both text and visual media. We're going to help people come together around a particular topic, such as our @NBA timelines experiences. Relentlessly refining Twitter will enable more people to get more out of Twitter faster.

How's that working?

For the first time in the company’s reporting history, Twitter said that in the fourth quarter its monthly active users had dropped.

Excluding those who access Twitter through messaging platforms, called “SMS Fast Followers,” the company reported 305 million monthly active user, a decline from 307 million in the third quarter.

Twitter's effort to alienate its current users and attract new ones seems to be succeeding only on the first part. The results confirm "the fears of advertisers and investors alike: the social-media site is in real trouble," and its market capitalization has fallen from a peak of about $35 billion last year to around $10 billion today. When it hits, like, $10,000, I will buy it myself and preserve it in amber. Farhad Manjoo has basically the same dream:

Perhaps there’s more promise in a future as an independent but private company; as a small and sustainable division of some larger tech or media conglomerate; or even as a venture that operates more like a nonprofit foundation.

Even if Twitter intends to remain a public corporation — because there does not seem to be much appetite, nor a very obvious mechanism, for investors to take it private — it’s time for Mr. Dorsey to reset expectations for what his company can become. Twitter should think of itself and portray itself to investors as more of a public utility than as a business that never stops growing, and that could ever hope to approach the market value of Facebook.

Elsewhere, Peach is kind of fun.

Banking and fraud.

There are two ways to think about this. One is the "why aren't more bankers in prison" approach, exemplified by Phil Angelides, who "is asking the Department of Justice why it has yet to call any senior bank executives to account" for the financial crisis. Angelides is in an interesting position here, since he was chairman of the Financial Crisis Inquiry Commission that produced an official government report on the crisis. Having done that inquiry, produced that report and "turned over evidence to the DoJ of potential wrongdoing in 2010," you'd think he might name the names of actual people who committed crimes and who he thinks should be in prison. Based on that evidence! That he collected! And then turned over to prosecutors to prosecute! Like if anyone could express, not just a general sense that more bankers should be in prison, but a particularized knowledge of which ones, it might be him. But, nah, his argument is essentially statistical: There were a lot of bad mortgages, so some identifiable but unidentified individuals must be guilty beyond a reasonable doubt of violating securities laws in selling those mortgages.

The other, more interesting way to think about it is that there is an essential fraud at the core of banking. Matt Klein makes the case that, "from a certain point of view, banking is an act of fraud": 

The mismatch between the advertised “safety” of bank debt and the riskiness of bank assets is what makes the industry profitable and its employees so well-paid. It may even help goad regular people into financing more worthwhile investments than would otherwise be possible. (Whether this extra lending creates much value isn’t clear.) But the mismatch between banks’ promises to depositors and banks’ actual ability to honour all these promises at the same time is also what makes the system vulnerable to crises.

I am fond of this framing -- sometimes I say that "the point of banking is to conceal risk" -- but you can see why it might cause a lot of people a lot of angst. If the socially productive core activity of banking is a bit dishonest, who's to say which sorts of dishonesty should land a banker in prison?

People are worried about unicorns.

Two more initial public offerings were postponed this week, and the "US IPO Window Could Stay Closed For Months," making life difficult for unicorns looking to escape the Enchanted Forest. But there are other exit options: "Two of the most prominent investors in ride-hailing service Lyft Inc.," Andreessen Horowitz and Founders Fund, "quietly sold $148 million in shares of the company in recent weeks, according to people familiar with the matter," selling the shares to Prince al-Waleed bin Talal and Kingdom Holding in December alongside Lyft's $1 billion funding round. Because the private markets offer both ten-digit fundraising opportunities for issuers, and nine-digit liquidity opportunities for early investors. Elsewhere, I'm a bit late to it, but this account of the Crunchies awards for tech startups is very funny:

Zenefits was also a finalist for last night’s Fastest Rising Startup award. In 2015, Zenefits had been a finalist for Best Health Startup. (Theranos won.)

People are worried about stock buybacks.

Yesterday's worrying buyback news was Amazon's announcement that its "Board of Directors authorized the Company to repurchase up to $5 billion of the Company’s common stock," which is a lot of stock to buy back at nearly a 400 P/E multiple. To be fair, though, the authorization doesn't require any purchases, is meant to be used "opportunistically," has no time limit, and replaces a 2010 $2 billion authorization that got a fair amount of use in 2011 and 2012 and none since. So Amazon isn't exactly pivoting from investing in its business to returning capital to shareholders. But if it does the full $5 billion this year, while still being, you know, Amazon, will that be evidence that corporate America has given up on innovation and investment, the way that Apple's massive buybacks apparently are?

In any case, there are a lot of buybacks:

American corporations repurchased more of their own shares in the first four weeks of the year than they did in the same period of 2015, according to Bank of America Corp. Goldman Sachs Group Inc. told clients this week that buybacks are accounting for nearly 20 percent of trading volume, according to two people who saw the note.

People are worried about bond market liquidity.

Here's the story of a distressed credit fund that started liquidating last May -- "after investors submitted redemption requests amounting to 90% of the fund’s assets" -- but isn't done yet, because of bond market illiquidity:

“In the final quarter of 2015, the funds experienced a substantial increase in volatility in the credit markets, primarily due to market concerns over global growth, the collapse in oil and other commodity prices and the illiquidity experienced by certain credit funds,” Warwick director Ralph Woodford wrote in a Feb. 5 letter to investors. “As a consequence, there was little or no liquidity in the markets for the fund’s remaining positions. Where liquidity was available, there was dramatic widening of the bid-offer spreads, meaning that it was not possible to sell these assets at what we considered to be their fair price.”

Investors have gotten a bit over half of their money back; the rest "will be transferred to a special-purpose vehicle dubbed Realising Fund, which will be unwound as market conditions permit." Awkwardly, the Realising Fund "will pay fees equal to 1.25% of assets and 20% of profits," making this not solely a story about bond market liquidity. 

Elsewhere, bond trading volume in January was down year-over-year, driven by "the 20.7% decline in trading of agency mortgage backed-securities." And here is a story about a Goldman Sachs partner who's been "put in charge of consolidating the bank's electronic market-making in its fixed-income, commodities and currencies businesses," and who is "part of a growing group of executives with algorithmic or equity backgrounds tasked with adapting banks’ fixed-income trading to a tougher business environment." 

Things happen.

Sweden’s Central Bank Cuts Main Interest Rate Further Below Zero. HSBC Rescinds Pay Freeze for 2016 but Keeps Hiring Ban in Place. Natixis buys majority stake in Peter J Solomon advisory boutique. MetLife Makes Its Case Against ‘Too Big to Fail’ Label. The Bizarre Money Triangle at the Top of Viacom. US yield curve narrows to 8-year low. Ackman's Pershing Square Holdings down 18.6 percent so far in 2016: investor. You Can Earn Big Bucks Watching Hedge Funder Steve Cohen. U.S. and Europe Reach Agreement on Derivatives Regulation. Puerto Rico creditors launch first counteroffer. Lagarde warns Ukraine to make a greater effort on reform. SEC Chair White on Activism & Board Diversity. Financial industry CEOs are underpaid. The Lender of Last Resort Function in the United States. Some terrible puns. Hitler is not great. Imaginary hot dogs become real hot dogs. Star Kart.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net